Response to Robert Blumen; “Did Real Bills Enable the Growth of Trade?”

Mr. Blumen starts his latest tirade against Professor Fekete by apologizing, admitting that he was guilty of calling Professor Fekete a ‘monetary crank’… then goes on to insult the Professor again.

Interestingly, he seemingly agrees with most of what the Professor says, but based on his (erroneous) belief in equilibrium theory, he then goes on to describe the Professor’s work as ‘piling a lot of nonsense on top of his rotting foundations’.

This is clearly emotional rhetoric, so let us get past it and get to the gist of Mr. Blumen’s argument. He attempts to refute the need for Real Bills by claiming that the economic system ‘equilibrates’. He claims that cash used in clearing would indeed stay out of savings, but the end result would simply mean an increase in demand for money. He assumes (erroneously) that cash used in clearing… vs. savings… would have no long term negative effect on the economy.

He claims that, under equilibrium conditions, the price structure would end up absorbing the extra demand for cash money, and once this adjustment is finished, the economy would function just as well as before the adjustment was made… albeit with new prices.
The process of reaching equilibrium would, according to Mr. Blumen, mean an adjustment in prices driven by a change in the allocation of money. Money that could be used as savings under Real Bills would by necessity have to be used to support the clearing function… Mr. Blumen does not consider this to be controversial. Unfortunately, equilibrium theory is controversial; it does not stand up to the test of reality.

The problem with equilibrium theory is simple, and is clear to anyone who took the trouble to listen to Professor Fekete; the demand for product is not steady… the ‘equilibrating’ process is impossible, as there is no fixed ‘target’ toward which the economy could ‘equilibrate’! In fact, as Professor Fekete has stated, a 100% Gold Standard would fail at the first Christmas shopping season.

The reason is perfectly clear; much more merchandise is sold in high season, therefore much more cash would be needed to support the clearing function… and where would this cash come from? Then, as the shopping season winds down, demand for cash drops… and there would be an excess of cash on hand. What to do with this excess cash?

Enemies of Gold have used this very argument in their demand for a ‘flexible’ currency! Of course, paper money is as flexible as desired… so much the worse for paper’s use as money, as a store of value, or as a numeraire; how can a meter stick with a flexible length be of any use to anyone? Gold is not flexible. The flexibility needed to accommodate swings in demand is provided by Real Bills in circulation.

Furthermore, the price structure responds much too slowly to cope with seasonal variations, never mind variations caused by crop failures, natural disasters, or simply changes in technology and consumer preferences. Only a mature Real Bills market and the instantly changing Bills discount rate have the rapid response required to deal with sudden variations in demand for goods… and money.

It is impossible for Gold unaided by Real Bills to accommodate rapid swings in demand, whether seasonal or otherwise; the Gold supply is fixed. Indeed, the huge stocks to flows ratio of Gold, around 80, ensures the stability of Gold as money, as a store of value, as the numeraire par excellence.

To accommodate swings in demand, there needs to be a flexible component in the monetary system; and Real Bills are this very component. More bills are drawn as more merchandise is delivered, and the newly drawn bills fund the clearing process. Once demand drops, fewer new bills are drawn, and existing Bills are extinguished by Gold on maturity… never more than 91 days. Any sudden change in demand for product is met by Bills, not by cash Gold.

Furthermore, all other things being equal, if more of the total stock of money is available for investment, aka savings, then interest rates experience downward pressure. If less cash (relative to the total stock) is available, because it is used for clearing, interest rates tend to rise. This effect cannot be ‘equlibrated’ at all… relatively more (or less) cash money would indeed change the long term price structure, but interest rates are driven by the ratio of savings to cash, not by total cash..

Low, steady interest rates are clearly conducive to production; projects that would be sub marginal at higher rates of interest become profitable if rates are low and steady. Real Bills thus free Gold for longer term investment. Real Bills circulation is essential to a workable Gold Standard.

Without the flexibility of Bills in responding to consumer demand, without the rapidity of response of the discount rate, and without the resultant lower general interest rates that prevail under Real Bills, production indeed suffers. No economy can run at maximum efficiency without unhindered Real Bills circulation.

One of the devastating consequences of this inefficiency is the tragedy of unemployment. Even the concept of unemployment did not exist under the Gold Standard and the Real Bills system as practiced in the nineteenth century. Unemployment became endemic with the failure of the Allies to restore Real Bills circulation after the end of the Great War… the failure to revive Bills circulation led directly to the Great Depression.

I have not even touched on the Moral superiority of Real Bills, such as their truly democratic aspect. The volume of Bills in circulation and the discount and interest rates are strictly market driven, and are not dictated by corrupt politicians and greedy bankers.

The equilibrium theory of economics is wrong, it is incomplete, and it does not reflect reality. It is too simple to account for the working of the real economy. Disequilibrium theory, that is non-linear analysis, on the other hand, can account for the vagaries of the real world. I suggest Mr. Blumen should study this aspect of economics, before ridiculing the work of others.

For readers of this article, you may be interested in my new book, Beyond Mises. The book is based on the work of Professor Antal Fekete… and on my own insights into New Austrian Economics. It is an easy read, without any prerequisite knowledge of economics. The book gives much more information about Money, Credit, Real Bills, etc. It is available at;